In recent years, observers of urban management have paid
increasingly close attention to the governance of metropolitan regions.
In a 2002 book on this topic, scholar and former municipal manager David
Miller suggests that "there is a movement, albeit painfully slow,
toward regional solutions to public problems in ... metropolitan areas.
(1) Interestingly, Miller points out that while local governments in
metropolitan areas are becoming even more diffused, they are also coming
together more often to tackle issues of common concern. This increased
collaboration no doubt owes itself to a recognition of the
interdependency of metropolitan governments and the potential of
cooperative solutions to difficult regional problems.

A strong case in favor of regionalism is eastern Racine County,
Wisconsin, where leaders signed a landmark intergovernmental agreement
on April 25, 2002. In one of the most comprehensive intermunicipal
agreements ever negotiated in the state of Wisconsin, the City of Racine
and six villages and towns set the framework for how the area will
develop over the next 50 years. The agreement includes provisions for
the sharing of costs for a major wastewater treatment facility expansion
and upgrade, sharing of costs for cultural amenities, and one of the
largest municipal property tax revenue sharing plans in the country. The
agreement has set the course for a shared vision of future expansion
that will serve the entire region, and has charted new territory for
intermunicipal cooperation.

A CITY AND ITS SUBURBS

Racine County is located on the western shore of Lake Michigan,
approximately 65 miles north of Chicago and 25 miles south of Milwaukee.
Like many areas with a large central city, eastern Racine County has
been characterized by large fiscal disparities and competition among
municipalities for property tax base. The City of Racine has a high tax
rate and low fiscal capacity relative to that of neighboring communities. This has resulted from a combination of factors over the
last four decades. In recent decades, Racine's industrial base has
eroded, as many businesses lost jobs to foreign competition. The
majority of new job growth and related residential development occurred
in the surrounding communities. Racine's share of the area's
manufacturing and commercial property values fell 12 percent between
1990 and 1998, from 62 percent to 50 percent. Between 1990 and 2000 the
city also lost 2.9 percent of its population. Racine now has 81,855
residents, down from a high of 95,162 in 1970.

While Racine lost population and its tax base, the towns of
Caledonia and Mount Pleasant and the Village of Sturtevant grew at a
rapid pace. Sturtevant's population grew by 39 percent between 1990
and 2000, while Mount Pleasant (15 percent) and Caledonia (12 percent)
also experienced impressive gains. With high property taxes, aging real
estate and infrastructure base, and high crime rates, Racine found
itself at a competitive disadvantage to these municipalities in terms of
attracting high-value commercial and residential development. By 1998,
even the poorest community in eastern Racine County had a per capita equalized property value that was 73 percent higher than that of Racine.

Yet even as its economic vitality declined, Racine continued to
provide infrastructure and amenities enjoyed by the entire area. Growth
in the surrounding municipalities was supported by Racine's policy
of extending water and sewer infrastructure without requiring annexation to the city. Racine was also providing approximately $1.3 million in
annual funding to the Racine Public Library, the Racine Zoological
Gardens, and the Wustum Museum of Fine Arts--facilities that are enjoyed
free of charge by all county residents. In summary, the city of Racine
was shouldering the financial burden for almost all of the "quality
of life" institutions in eastern Racine County. However, the
city's ability to fund these facilities through increased
residential, commercial, and industrial taxes was severely limited. Not
only that, but its generous policy of extending sewer and water service
without annexation was feeding the growth of the very suburbs it was
competing with for much-needed tax base. These circumstances set the
stage for consideration of a revolutionary approach to regional
cooperation.

REGIONAL REVENUE SHARING

Unlike most other metropolitan areas experiencing central city
decline, eastern Racine County turned to regional revenue sharing as a
key to reduce competition and disparities and foster interregional cooperation. Intermunicipal revenue sharing plans, although not common,
have been implemented in other places throughout the United States. Of
the existing large-scale programs, only four involve the sharing of
property tax revenues, as opposed to sales taxes, income taxes, or
occupational license fees. Only two of the four, the Minneapolis-St.
Paul Fiscal Disparities Program and the Hackensack Meadowlands Program,
are of significant scope in terms of the number of participants and the
amount of revenues being shared.

Created in 1971 by the Minneapolis Fiscal Disparities Act
(Minnesota Statutes, Chapter 473F), the Minneapolis-St. Paul program is
the largest revenue sharing program in the country, covering seven
counties and 300 local governments. The intent of the program is to
reduce fiscal disparities by redistributing property tax revenues from
communities with high property value per capita to communities with low
property value per capita. However, the formula used for this program
sometimes results in redistribution in the opposite direction--from poor
communities to wealthy communities. These inconsistencies are well
documented.

The Hackensack Meadowlands Program was created to help manage
development in 14 municipalities that are a part of the Hackensack
Meadowlands in New Jersey, a district with important wetlands (P.L.1968,
c.404.). The intent was to protect wetlands by reducing competition for
new development. Since the program's inception in 1970,
approximately 40 percent of the revenues from any new development have
been shared. The program is not intended to equalize fiscal capacity.

The revenue sharing plan developed for eastern Racine County is
significantly different than any of the other major property tax revenue
sharing programs in the country. It was adopted voluntarily by local
governments rather than by legislative directive. It involves
significant transfers of tax revenues for the purpose of equalizing
fiscal capacity. Unlike the Minnesota model, it was designed to always
transfer revenues from high fiscal capacity communities to low fiscal
capacity communities. Finally, it was developed within the context of a
comprehensive intermunicipal agreement that addressed all of the major
issues of the communities involved. Resolving the fiscal capacity
disparities paved the way for cooperative discussions on a variety of
other topics.

WASTEWATER--THE COOPERATION CATALYST

The catalyst for revolutionary changes in regional cooperation in
Racine proved to be one of the most basic of municipal
services--wastewater treatment. For obvious reasons, wastewater
treatment is essential to the area's growth and quality of life. By
1997, however, the city's wastewater treatment facility, which
provides sewer service to the surrounding communities, was nearing full
capacity and Racine had begun facility planning. The resulting plan
showed that the facility was in need of major upgrades and expansion,
estimated to be in the range of $81 million. Some of the proposed
improvements involved the system's inability to handle wastewater
flows, which occasionally spilled into Lake Michigan during major
storms. In addition, some of the equipment was nearing the end of its
useful life, and the treatment processes needed to be updated to improve
the quality of the wastewater effluent. Altogether, the upgrades needed
to accommodate existing customers accounted for about 30 percent of the
total project costs.

The majority of the improvements were needed to accommodate the
growth of the suburbs. Almost 70 percent of the project costs, including
improvements to major interceptor sewers, are for increasing the
facility's capacity so that it can handle anticipated growth
through the year 2020. Without these system upgrades, the Village of
Sturtevant and the towns of Caledonia, Mount Pleasant, Yorkville, and
Raymond would have restricted residential, commercial, and industrial
growth.

Initially, Racine hired an attorney and a multidisciplinary municipal engineering and consulting firm with experience in developing
intermunicipal agreements to negotiate a wastewater service agreement.
These experts found that a continuation of past arrangements for
wastewater service to the outlying communities would end up costing
Racine's utility customers more than their fair share for sewer
service. Furthermore, by providing sewer service to the suburbs, the
city was facilitating economic growth in those communities at its own
expense. It was clear that Racine needed to find a new solution to the
broader problem of inequity in service provision between itself and its
neighbors, and that the solution would have to be in place before sewer
service were extended any further.

Negotiations over the wastewater treatment facility expansion
started more than five years ago. To say that the negotiations were
contentious at first would be an understatement. The stakes were high,
and each of the parties brought to the table a list of contentious
issues that transcended the question of how to pay for the wastewater
treatment facility. As the discussions progressed, it became clear that
either the communities would devise a cooperative strategy or they would
all suffer the consequences.

The county executive called together the heads of the area
governments and the executive director of the Southeastern Wisconsin
Regional Planning Commission for monthly meetings with the engineering
consultant to discuss and resolve the many issues between Racine and its
neighbors. Each party had the opportunity to raise topics for the group
to consider. If an existing condition or cost sharing practice was
thought to be inequitable by one of the communities, the consultant
would study and document the facts relative to the actual cost and use
of the service and what portion was being paid for by each party. While
the needs and goals of individual communities were brought to the table,
there was a growing recognition that the future of the entire region
depended on finding an equitable solution for everyone.

The first order of business was to develop a fair way to allocate
the costs of the wastewater treatment facility upgrade and expansion. In
the past, as is common practice throughout the country, the utility
simply included capital costs for the wastewater treatment facility in
its annual sewer user charges billed to the outlying communities. Since
the amount of user charges billed to each community depends on the
community's share of the total volume of sewage, capital costs were
paid for in proportion to the percentage of current wastewater flows. If
the costs of the planned upgrade and expansion were paid for through
user charges, Racine, which accounts for approximately 64 percent of the
wastewater flows, would have carried 64 percent of the annual costs
until new growth took place in the suburbs. However, almost 70 percent
of the costs are for expanding the facility to accommodate future
increases in flows, only 8 percent of which will be generated in Racine.
Recovering the costs of expanding the facility through user charges
would have resulted in Racine customers carrying the cost of new
capacity created to serve growth in the suburbs.

Instead, the plan called for each community to purchase capacity
rights in the wastewater treatment facility and to pay up front for
their share of the capital costs. To allocate costs to the various
municipalities, the project costs were categorized as either upgrade
costs or expansion costs. Upgrade costs were to be paid for through the
user charge, while expansion costs were allocated on the basis of future
increases in wastewater flows and paid for directly by the communities
requiring the extra capacity. This concept of purchasing capacity rights
to the wastewater treatment facility gained acceptance relatively
quickly.

THE RACINE MODEL

As discussions progressed, it became clear that there were other
issues that needed to be resolved, most importantly the fiscal
inequities and competition between Racine and its suburbs. The heads of
these governments ultimately decided to take intergovernmental
cooperation a step further and develop a regional revenue sharing plan
for the Racine area. The group identified several problems among the
communities in eastern Racine County that could be addressed by revenue
sharing, and laid out the following goals for the property tax revenue
sharing program:

* Less competition among neighboring communities for certain types
of economic activity

* Fewer annexation disputes

None of the existing revenue sharing programs the group studied
could meet all of these objectives. However, these programs and the
academic literature offered lessons and ideas that were incorporated
into a workable plan for the Racine area.

The plan that evolved included two components, each with a
different yet complimentary purpose. First, the program improves
cooperation and curtails annexation disputes in the area by reducing
competition for new development among the participating municipalities.
When one of the municipalities receives new commercial or industrial
development, a portion of the property tax revenues from that new
development is shared with the other municipalities. Second, the program
serves to strengthen the financial health of the area and equalize the
tax base per capita, or fiscal capacity, by distributing property tax
revenues more evenly among area municipalities.

The program requires that all participating municipalities
contribute a portion of their industrial and commercial property tax
base to a shared pool. As the first step in calculating revenue sharing
payments, each community contributes a percentage of its 1999 commercial
and industrial tax base and a percentage of the increase in its
commercial and industrial tax base since 1999. In the second step, each
community contributes an additional share of its tax base to the pool or
receives a distribution from the pool based on its relative fiscal
capacity.

Communities with a fiscal capacity higher than the weighted average
of the participating municipalities contribute additional tax base to
the pool, while communities with a lower than average fiscal capacity
receive a distribution of tax base from the shared pool. Each
community's new effective tax rate, taking into account the amount
of tax base shared, is then applied to its net contribution to, or
distribution from, the shared tax base pool to determine the amount of
revenues that the community receives from or pays into the pool. The
total payments into the pool equal the total amount paid out, so the
revenue sharing plan is entirely self-financing. Exhibit 1 illustrates
the revenue sharing model, while Exhibit 2 shows the impact of 2003
revenue sharing payments.

The intercommunity cooperation agreement is structured so that
growth pays for growth, rather than having the residents of Racine
shoulder the financial responsibility for suburban expansion. Each of
the communities outside the central city has purchased future capacity
at the wastewater treatment facility. Mount Pleasant expects to have the
most future growth, and has purchased rights to almost 30 percent of the
total capacity of the upgraded and expanded facility.

An additional piece of the intermunicipal agreement was a provision
to compensate Racine for services related to the zoo, museum, and
library. The revenue used to make payments to the city for these
cultural facilities comes from surplus income generated by the
wastewater utility. Arguably, this is revenue that belongs to the
utility. However, within the framework of intermunicipal cooperation, it
was agreed that a portion of these funds would be returned to the city
for the library, zoo, and art museum. Racine County has begun to
increase its funding level for these services, further reducing the
inequities in the funding arrangements.

The revenue sharing income is designated for rebuilding aging
infrastructure and restoring brownfield sites in Racine without
compromising social welfare programs or other city services. The
long-term goal is to increase Racine's tax base, which will lower
taxes in the city and reduce the tax base sharing payments from the
surrounding communities.

In order to meet the needs of the towns of Caledonia and Mount
Pleasant, two of the most populous towns in Wisconsin, Racine agreed to
boundary adjustments with each of the communities. The city also agreed
to support their applications to the State of Wisconsin for
incorporation as cities or villages. Under Wisconsin law, it would be
very difficult, if not impossible, for either of these towns to
incorporate over the objections of Racine.

A VISION FOR THE FUTURE

Work on the first phase of the wastewater treatment facility began
in 2002. Phase 2, the full-blown expansion, began in early 2003. Mount
Pleasant's petition for incorporation was granted on June 6, 2003.
A referendum passed on September 9, 2003, and a new Mount Pleasant
Village Board was elected on November 4, 2003. The Town of Caledonia is
now holding informational meetings on future incorporation. The City of
Racine has formed several task forces to allocate the new shared
revenues. Some of the money, however, is already earmarked for specific
projects. For example, $6 million of the revenues coming from the
Village of Mount Pleasant will be spent in a joint impact zone on the
RacineMount Pleasant border.

Infrastructure will be built, business and residential development
will occur, and the population of eastern Racine County will rise. But
the real story is the extraordinary effort that was put forth to
accomplish these feats without the all too common political backbiting and contentious legal maneuvering that has become part of the fabric of
regional issues. Everyone involved in this five-year process made
sacrifices and compromises. But the shared vision that eastern Racine
County could function together as a desirable place to live, work, and
play became the overriding factor. The area was recently named one of 10
All-America Cities for 2003, and the sewer agreement was cited as a
major factor in the judges' decision. The nation will be watching
as this new revenue sharing agreement unfolds.